Millennials Say ‘Meh’ to Banks

And this time it doesn’t come from the regulators. The source of bad news is the Millennial generation who have given traditional banks a big “meh” when it comes to the importance they place on banks vis a vis the other relationships in their lives.

A study called The Millennial Disruption Index (MDI) came out last week. The MDI tracked 10,000 people born between 1981 and 2000 over three years in order to document their attitudes on a number of issues related to brand and industry preferences and perceptions. I’ll say at the start that one of my pet peeves about stories involving Millennials is the inconsistent way in which they are defined.

That makes drawing conclusions about the data presented about them tricky and even maybe misleading. For you sticklers out there, the most reliable and consistently used segmentation is ages 18 to 33 (or those born between 1980 and 1996). So keep that in mind as you read what I’m about to tell you.

Here’s the good news.

The Millennial generation is all about innovation in financial services and believes that innovation will transform the sector.

Where Millennials think innovation will come from

Now for the bad news—well bad if you’re a banker. Millennials don’t believe that innovation will come from you. In fact, almost three-quarters of them would be more excited by an offer that came from a tech company like Apple, PayPal, Amazon or Google than from their bank. And almost as many would rather go to the dentist than listen to anything their banker had to say.

Well, at least there’s some good news for dentists.

And to make matters even worse, all four of the leading banks were among the least loved brands by this group.

Now these 18-34 year olds for the most part have a checking account and, therefore, a debit card. And they use mobile banking like crazy – in fact, 90 percent of Millennials do.

They’re a tech-savvy group

They are tech savvy. Some refer to this generation as the digital natives, and mobile phone addicted. Nearly 100 percent of Millennials (96 percent to be precise) own a cell phone, and 83 percent of that group owns a smart phone, according to Pew’s latest research. Oh, also, no surprise here, the typical bitcoin user is a Millennial (average age is 32 years, and 96 percent are male), which of course is different than saying that the typical Millennial is a bitcoin user.

What’s really interesting about these findings is the degree to which this group disassociates funding sources – such as their debit or credit accounts – from the mobile apps that they may register payment products to in order to transact. They surely all have iTunes, Amazon, PayPal and/or Google Play accounts, and any number of apps for which they have payment accounts registered. All of those products are linked to their credit cards or to their bank account through their debit card issuer or ACH.

So, it’s not like Millennials don’t value the utility of the funding sources that make transacting possible via this apps or online accounts, they just associate the innovation with those tech brands that enable the transaction to actually take place. They view the underlying funding source as a commodity that they can get anywhere; part of MID’s finding was that one in three Millennials are open to switching their bank in the next 90 days.

Why mobile is a hard sell for banks

So, this is the uphill battle that banks have in introducing mobile-payments apps – the Millennials simply don’t view them as innovators.

Now, maybe banks shouldn’t lose too much sleep over this since it’s the parents of the Millennials who have all of the money anyway. We tend to forget that.

Millennials control about $170 billion a year in spending power, which is down a bit from the year prior as un- and underemployment in this sector continues to increase. Their parents, on the other hand, drive $2.9 trillion in spending a year and stand to inherit as much as six times that amount over the next twenty. Maybe banks have seen these statistics and shrug all of this Millennial attitude stuff off since, in addition to being fickle, the Millennial generation isn’t exactly rolling in the dough right now.

3 Larger Issues

But this finding speaks to three larger issues banks are facing in the age of digital commerce. The first is that digital “wallets” make funding sources invisible – all of them. And we all know what they say about “out of sight, out of mind.”

Changing banks for Boomers, with a more complicated financial life, is a hassle, but for Millennials it isn’t all that inconvenient. But both groups cause existing providers to worry, though, about the potential brand erosion that comes with being subordinated to a consumer-facing app or digital “wallet” that is used for transacting across retail channels.

The second issue is the degree to which bank-branded digital “containers” will be embraced by either group. Certainly Millennials don’t seem predisposed to using one that comes from a brand they don’t like and perceive as uninnovative and boring. Uninnovative and boring is apparently fine when it comes to keeping money safe and secure, but there is too much cognitive dissonance to overcome for this group to associate the “safety and soundness” guys with the hip and happening tech innovators that make digital payments useful and valuable.

The challenge for bankers is to convince their parents to use a brand that they have only ever associated with a plastic card to transact in a digital world instead of a third-party branded one that started life as a digital product and that they comfortably use online today.

The third issue is that these Millennials are consumers of alternative financial products and lending services – and even if they aren’t, they read about them in PYMNTs.com and other tech publications. Nearly a third earning less than $25K and nearly 30 percent of those earning $50K – $74.9K had used check-cashing services in the last year, according to Think Finance. Many have used and/or are familiar with alternative lenders such as Lending Club, Prosper, Upstart and a whole host of other providers who use the Internet exclusively to make these products available.

They’re also users of alternative banking products. Products like Walmart’s BlueBird and T-Mobile’s Mobile Money product are all targeted to the “unhappily banked” Millennial who’s probably also been hit with an increase in bank fees on basic banking services.

A look at China’s experiences

To see what the future might look like for Millennials and the bankers that serve them, one might need to take a look at what’s happening in China.

Banks in China have also fallen out of favor with its consumer base for a variety of reasons (remember in China, all the banks are owned by the government—and what could be worse – a bank, and owned by the government!) and alternative players have stopped in to offer new services. Internet giants like Alibaba and Tencent have amassed hundreds of millions of consumers with digital accounts that they use to buy online. Just this month, the government approved 10 private-sector firms to set up banks. Alibaba was one of them.

Alibaba’s 2012 sales were $170 billion. Alibaba also partnered at the end of 2013 with a Chinese fund-management company to create an online fund so that its Alipay customers can invest funds. Yields on those accounts are much higher than those of China’s banks, which, not surprisingly, have created enormous demand for those services.

Tencent did the same thing. As Jack Ma, the chairman of Alibaba, said recently, “the current financial industry’s understanding of the Internet is far less than the Internet’s understanding of finance.”

Although China’s traditional consumer is said to likely stick to the traditional bank given their reputation for safety and soundness, its emerging middle class is fleeing them for the online-services providers they view as their access to a digital future.

The U.S. bank challenge

The question for the U.S. market in light of the recent MDI study is how – and whether – traditional banks can convince Millennials that the place that keeps their money safe is also the place that can give them an onramp to a satisfying digital financial-services portfolio. It might not matter that much to them now, but it might when they start inheriting the fruits of their parent’s and grandparent’s labor in the decades to come.

Now, can you imagine the conniption the Fed and Congress—incited by bank lobbyists– would have if Google said it wanted to start a bank? Or PayPal said it wanted to buy one? Even WalMart was cut off at the knees when it tried that a few years ago.

Until then, these third parties will just continue to play to their strengths, while relegating the traditional players further and further to the back of line, as they play to theirs.